What does it mean to be conventional? Merriam Webster defines conventional as “used or accepted by most people.” While that’s oddly appropriate for a popular form of financing like conventional loans, it doesn’t really offer much insight into the shape that these loans might take. Then again, people might be surprised to realize that there are actually several types of conventional loans. Learning a bit more about them can help you discover which one is the best tool to help you achieve your housing goals.
The Many Types of Conventional Loans
As the Consumer Financial Protection Bureau explains, a conventional loan is any home loan that isn’t backed with a guarantee or insurance from the government. Conventional loans are not a one-size-fits-all kind of home loan product. There are a variety of types of conventional loans to choose from. This allows homebuyers with different goals and resources to find the best loan product for their unique situation. Which one is right for you? To find out, you might need to do a little research.
Conforming Conventional Loans
As Credit Karma reports, a conforming loan gets its name from its habit of conforming to the rules laid out by two government-controlled entities: the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. If those names are unfamiliar, you may recognize the entities by the nicknames that are more frequently used to discuss them: Fannie Mae and Freddie Mac. These two entities were created to help keep the housing market functioning smoothly. As part of their duties, they buy mortgages from lenders. This provides lenders with a ready supply of fresh cash that they can use to make new home loans. However, they only buy mortgages that meet specific requirements, including standards for borrowers and loan limits that are set by the Federal Housing Finance Agency for each county. Conforming loans are widely available, and they are available in a wide range of formats.
Nonconforming Conventional Loans
What if you need to borrow more than the loan limit set for a conforming loan? In that case, you’ll be shopping for a jumbo loan, which is a type of nonconforming loan. A nonconforming loan is a home loan that doesn’t follow the guidelines set out by Fannie Mae and Freddie Mac. As Investopedia indicates, the size of the loan amount is often the reason a loan is labeled nonconforming, but it isn’t the only one. Other causes include issues with the borrower’s down payment size, credit score, credit history, documentation, or debt-to-income ratio.
Fixed-Rate Conventional Loans
Every home loan requires interest. As NerdWallet points out, homebuyers who opt for a fixed-rate conventional loan have the security of a consistent interest rate that stays the same throughout the entire lifespan of their home loan. A 30-year fixed-rate conventional home loan is a persistently popular choice because it generally provides affordable monthly mortgage payments. Many buyers also appreciate the fact that the terms and conditions of a fixed-rate loan are relatively straightforward. They’re often viewed as easier to understand than some of the more complicated types of loans.
Adjustable-Rate Conventional Loans
Not all conventional mortgages are fixed-rate mortgages. Some are adjustable-rate mortgages (ARMs). According to NerdWallet, an ARM is a home loan that starts out with a low rate for a period of 3 to 10 years. Then, it adjusts. The way that it adjusts depends on the specific terms of your loan. While some people find ARMs unsettling and insist that fixed-rate loans are always superior, others argue that ARMs can be a better option for homeowners who are certain that they’ll only be in the loan for a few years, especially if they plan to sell or refinance before the initial period ends, and the loan rate begins shifting unpredictably.
When you’re trying to determine the best way to reach your housing goals, turn to PrimeLending Twin Cities. Our team of friendly, knowledgeable home loan experts is ready to listen to your plans so that we can help you find the loan products that will help you make them work. Contact us today to discover more about our services and how they can help you make your dreams of owning a home a reality.